Commodity Wrap - Oil, Gold, Corn, Sugar (05.04.2022)

Oil

• Both Brent and WTI managed to defend short-term upward trendlines

• WTI returned above $100 per barrel while Brent trades near $108 per barrel

• Current rebound in oil prices is driven by big price hikes announced by Saudi Arabia for Asia delivery. Premium above benchmark prices is the highest in history and amounts to almost $10 per barrel

• Around 60% of Saudi oil is shipped to Asia (mostly to China, Japan, South Korea and India)

• Vitol says that drop in oil price below $100 is unjustified given current fundamentals

• As much as 1.5 million barrels of daily Russian exports may be impacted by current geopolitical situation

• The US energy adviser said that there is a deficit of around 2 million barrels per day in global markets. He also does not believe that massive SPR release combined with drop in Chinese demand will offset this deficit

• Goldman Sachs lowered its oil price forecast for second half of 2022 to $100 per barrel, down from previous $110-115 forecast)

Saudi Aramco announced record export prices for Asian customers. Chart shows premium paid over Brent benchmark. Source: Bloomberg

Saudi oil exports recovered to pre-pandemic levels. There is still room to boost exports by around 0.5m bpd, showing that Saudi Arabia's ability to prevent price increases is limited. Source: Bloomberg

Gold

• Gold continues to trade in $1,915-1,950 range

• A triangle pattern surfaced on a chart with a textbook breakout range of $50 per ounce

• Long-term US real interest rate expectations increase a bit but remain in negative territory (-1.65%). Assuming that US rates will increase to 3% over the next 12 months, inflation would still remain at around 4.6%

• On the other hand, song-term US real interest rate expectations continue to drop and currently sit at around -3%. Given that Fed is expected to raise rates by around 100 basis points until mid-2022 and that US inflation continues to increase, there is strong case for further drop in real rate expectations

• Negative real rates are the main factor that could provide more fuel for gold in mid- and long-term

• US yield curve inverted (2s yields are more than 4 basis points higher than 10s yields). A strong inverse correlation can be spotted with gold. Should the yield curve continue to invert, gold may benefit. However, yield curve inversions tend to be short-lived events

3- and 12-month US real rate expectations remain negative. Source: Bloomberg

US yield curve inversion supports further gains on the gold market. However, it should be noted that yield curve inversions tend to be short-lived. Source: Bloomberg

Corn

• According to the latest USDA report, corn acreage may drop to 89.5 million acres this year

• Acreage for soybean is expected to reach 91 million acres. This would be the third time in history when corn acreage is smaller than soy acreage

• Such a situation is driven mostly by higher fertilizer prices - corn farming requires more fertilizers than soybean farming. Soybean required four times less fertilizers than corn

• Unlike corn, soybean does not require nitrogen fertilizers. Current US prices for this type of fertilizer are more than $1,500 per tonne, up from around $500 per tonne a year ago

• Quarterly USDA report showed that stockpiles of this commodity increased just 2% YoY, what suggests that supply of corn may be limited

• Ukraine accounts for around 20% of global corn exports and war in the country may keep prices elevated

• Ratio of soybean to corn price dropped significantly but remain above 2.00 - a level that historically saw reversals

US farmers plan to plant less corn than soybean. If confirmed, it would be the third such situation in history after 1983 and 2018. The US government encouraged farmers to lower acreage in 1983 to prop up low prices while 2018 saw US-China trade war. Source: Bloomberg

Ratio of soybean to corn price dropped significantly but remain above 2.00 - a level that historically saw reversals. Source: Bloomberg

Sugar

• Sugar price approaches a key resistance near 20 cents per pound

• Sugar traders should keep an eye on the corn market as well. Corn in used for ethanol production in the United States while sugarcane is used in Brazil

• Potential ethanol deficit due to lower corn acreage may be an opportunity for sugarcane and sugar

• Seasonal patterns suggest that sugar may have a period of price increases ahead

• Speculators on sugar market become more active, following months-long period of reductions in open long positions

In case we see a strong and decisive break above 20.00 area, upward move on SUGAR may extend towards 21.50 or even 24.00. Source: xStation5